Is It Time To Buy China Focused REITs?

Ever since China unleashed one of the country's most daring policy campaigns in decades to put a floor to the economic woes that China has been facing over the last 3 years, China-focused REITs have seen a drastic melt-up in prices with counters like CapitaLand China Trust pumping up to 20% in the short span of a week.

In this article, I’ll explore whether China-focused REITs are worth considering given what has transpired over the last few weeks. I will elaborate on my hypothesis on what this round of policies would do for REITs and whether the valuations still make sense for two of the biggest China-focused REITs – Sasseur and CapitaLand China Trust.

What are the easing measures:

In an attempt to put a stop to the economic pessimism that had resulted in deflationary pressures and potentially caused a negative economic feedback loop that pushes economic activity and growth lower than what the government can tolerate, the Chinese government have launched a series of easing measures that include:

Relaxed rules for home buyers – all of which point towards improving the demand for home purchases (i.e. lower downpayment, ability to purchase more than 1 home in tier 1 city and further lowering of borrowing cost of existing homeowners)
Further cut to reserve requirement ratio and key policy rates – Unleashing up to 1 trillion Yuan in long-term liquidity for banks which could be injected into the economy via higher lending and investments.
Strengthen fiscal policies via financial assistance, cash handouts and subsidies of up to 500 million yuan to stimulate and boost consumption and encourage spending.

How does this affect REITs

By attempting to stabilize property prices and giving out financial assistance, the government is focused on encouraging consumption and spending by restoring consumer confidence. By further cutting the reserve requirement ratio and key policy rates, the government is focused on unleashing more liquidity to support businesses with cheap money while encouraging share buybacks on their discounted shares.

In other words, in relation to how the policies would affect the fundamentals of REITs, I believe that this round of measures will:

Increase domestic consumption and spending which ultimately benefit retail properties in the form of higher tenants’ sales and hence higher variable rental income generated
Further lower borrowing costs which will help increase the bottom line DPU as REITs will have to incur lesser financing expense – this ultimately benefits the REITs across all sectors

On the topic of industrial REITs, I do not believe that this round of easing measures will do much to help improve the occupancy rates as the headwinds that industrial REITs are facing are more outward facing which deals with the strength of the global economy and more importantly political stability.

Given that the bulk of the cause of the deteriorating occupancy rate is due to the trend of friendshoring followed by a plateauing of trade between the developed markets and China, the current round of stimulus is unlikely to reverse any of the ongoing global trends.

At best, I foresee the occupancy rate of industrial REITs to remain stable and maybe improve slightly instead of a sharp rebound that most people would expect.

Is it a good time to buy?

On the topic of valuation, based on the 2023 Annual report figures, CapitaLand China Trust currently trades around 6% yield from operations while Sasseur REIT currently trades around 8% yield from operations. (A -10% DPS growth is included for CCT as a result of their exposure to industrial properties)

Given the disproportionate increase in share prices over the last month, CapitaLand China Trust's yield from the operation has decreased from 8% to 6% which has become less attractive as compared to that of Sasseur REIT.

As of where we stand today, I would not consider a position in CCT as for 6% yield from operations, there are better alternatives in the market without the headwinds and risks that are associated with China exposure. Investors should also consider the impact of lease decay given that the bulk of CCT’s properties have an underlying land lease expiring around the late 2040s.

On the other hand, investors hoping to bet on the Chinese consumer recovery can consider Sasseur REITs as firstly, the portfolio is 100% in the retail sector.

Secondly, given that Sassuer REIT owns mainly outlet malls, it is better positioned to capture the wallets of a recovering consumer base that may still be cautious with their spending.

Thirdly, given that Sassuer REIT is trading at 8% yield from operations, I’d consider this a fair price for investors looking to start an exposure.

However, similar to CCT, investors must take into account the risks associated with investing in Chinese properties which include:

the impact of lease decay on the net asset value of the REIT itself
the impact of a weakening yuan against SGD which could cause a drag in DPU when converted into SGD

On a personal note, I’m not looking at starting a position in any of the Chinese REITs at the moment as I am only looking at gaining exposure should they reach my undervalued price targets – both of which are not at the levels yet.

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